From the May 01, 2009 issue of Futures Magazine • Subscribe!

LACM settles with regulator

Last Atlantis Capital Management (LACM) and principal Irwin Berger has agreed to withdraw its National Futures Association membership in a settlement of a complaint charging the firm and Berger with numerous NFA reporting violations.

LACM and Berger agreed to a settlement without admitting or denying the violations alleged in the complaint. The decision included the NFA panel’s belief that LACM provided deceptive reports to pool participants, failed to properly compute and present financial statements and failed to provide complete and accurate disclosures. Berger disagrees with those findings.

The case is related to LACM’s Share Class O options trading strategy. The strategy is a high-frequency statistical arbitrage options strategy that produces significant proceeds from payment for order flow (PFOF).

According to NFA documents, in March of 2007, Interactive Brokers withheld PFOF rebates from LACM’s introducing Broker, Petra. In August of 2007, IB filed an arbitration claim with the Financial Industry Regulatory Authority against LACM and Petra alleging that they entered into illegal “wash trades” for the purpose of generating PFOF rebates. LACM and Petra filed a counterclaim seeking the rebates that had been withheld.

Those claims are awaiting an arbitration hearing in May. IB is asking for $9.7 million in payments made to LACM’s introducing broker and LACM is asking for $5.1 million in rebates that were withheld.

The way the rebates generally work is that an options exchange can collect a marketing fee assessed on trades from participating firms. The funds go to market makers who determine how to distribute the rebates.

According to LACM’s response to the complaint, its broker had a contractual agreement with IB regarding PFOF generated from LACM’s trading activity. Payments would flow from IB and eventually be placed with Share Class O. Berger adds that LACM is an exempt hedge fund and was not required to be registered with NFA.

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